Canada’s inflation rate accelerates to 2%, likely a temporary jump

Canada’s annual inflation rate accelerated to 2% last month as higher costs for airfares and fresh vegetables offset cheaper prices at the pump, Statistics Canada said Friday. A deeper dive into the numbers reveals the increase is likely temporary.

Inflation was 1.7% in November, and economists had expected the same year-over-year increase for December, according to Thomson Reuters Eikon.

In particular, the StatsCan report says Canadians paid about 22% more last month for air transportation compared to a year earlier.

CIBC director and senior economist Royce Mendes attributed the increased figure to a methodological change in the way airfares are calculated.

“There’s little reason for markets to react heavily to the news,” Mendes said in a report, “particularly given that the Bank of Canada’s three core measures remained just a hair below the 2% target.”

The average of the central bank’s three core inflation readings, which leave out more volatile items like gasoline, remained just under 2% last month at 1.9%, said StatsCan.

The Bank of Canada, which aims to keep inflation between 1% and 3%, can raise its trend-setting interest rate as a way to keep inflation from climbing too high. The bank pays close attention to core inflation ahead of its rate decisions.

Last week, Bank of Canada governor Stephen Poloz kept his benchmark interest rate unchanged at 1.75% as the economy navigates what he described as a temporary period of softness created by a recent sharp decline in world oil prices.

Poloz reiterated that more rate increases will still be necessary “over time.” He has introduced five rate hikes since mid-2017 in response to the stronger economy.

In a report, BMO chief economist Douglas Porter said there’s nothing in today’s inflation data to drive the central bank off the sidelines anytime soon, though “underlying firmness” in prices keeps rate hikes “very much in play” later this year. BMO is still calling for two rate hikes this year, in July and December.

For markets, Mendes said today’s data caused the loonie to rally and bonds to sell off in the minutes after the release, but some of those moves reversed as investors began to understand that the acceleration was caused by a methodology change.

Overall, the data indicate that “underlying price pressures appear consistent with a healthy, but not overheating, domestic economy,” Mendes said in his report. CIBC calls for one rate hike this year from the central bank, in the latter half.

Staff, with files from The Canadian Press

The Canadian Press is a national news agency headquartered in Toronto and founded in 1917.